Memorandum from the Deputy Prime Minister
and Secretary of State for the Environment, Transport and the
Regions

SIXTH CONFERENCE OF THE PARTIES TO THE UNITED NATIONS
FRAMEWORK CONVENTION ON CLIMATE CHANGE

The Sixth Conference of the Parties (COP6) to
the UN Framework Convention on Climate Change (UN FCCC), which
took place in The Hague from 13 to 25 November 2000, aimed to
resolve outstanding issues relating to the implementation of the
Kyoto Protocol, so as to pave the way for its ratification and
entry into force. This note sets out the background to COP6, considers
the reasons for the breakdown of negotiations in The Hague, and
describes next steps.

THE UN FCCC ANDTHE KYOTO
PROTOCOL

The UN FCCC, which entered into force in 1994,
represented the international community's initial response to
the problem of climate change. The ultimate objective of the Convention
is the stabilisation of greenhouse gas concentrations in the atmosphere
at a level that would prevent dangerous anthropogenic interference
with the climate system. Its principal provisions are as follows:

 All Parties to publish national greenhouse
gas emissions inventories and put in place national programmes
containing measures to mitigate climate change by addressing man-made
emissions and removal by sinks[1]
of greenhouse gases.

 Parties should take action in accordance
with their common but differentiated responsibilities and respective
capabilities. Developed countries should take the lead given that
they are responsible for the largest share of historical and current
emissions.

 Developed countries committed themselves
to aim to return their emissions to 1990 levels by the end of
the last decade.

 Developed countries required to provide
new and additional financial resources to help developing countries
meet their Convention obligations. Developed countries required
to help particularly vulnerable developing countries meet the
costs of adaptation to the adverse effects of climate change,
to promote and finance the transfer of environmentally sound technologies
to developing countries and to support capacity building. The
Convention also requires Parties to consider what actions are
needed to address the impacts of response measures on developing
countries, including countries whose economies are highly dependent
on fossil fuels.

In 1995 the first Conference of the Parties
to the Convention decided that the existing commitments of developed
countries were inadequate and a new round of talks was opened
with the aim of strengthening them. This led to the adoption of
the Kyoto Protocol to the Convention in December 1997. Key provisions
of the Protocol are as follows:

 Developed countries to reduce their
combined emissions of a basket of six greenhouse gases[2]
by at least 5 per cent compared to 1990 levels by 2008-12 (the
first commitment period). The EU agreed to reduce by 8 per cent,
the United States by 7 per cent and Japan by 6 per cent. The Russian
Federation agreed to stabilise its emissions at 1990 levels, while
some countries agreed to limit the growth of their emissions (Iceland
to 10 per cent, Australia to 8 per cent and Norway to 1 per cent).

 Three flexibility mechanisms (widely
referred to as the "Kyoto mechanisms") established to
allow developed countries to meet their commitments more cost-effectively
by "buying" emission reductions in other countries:

 Emissions trading: developed
countries can buy emission reduction credits from other developed
countries

 Joint Implementation (JI): developed
countries get credits for undertaking emission reduction projects
in other developed countries

 Use of the Kyoto mechanisms must
be supplemental to domestic action to reduce emissions

 Developed countries allowed to count
net removals by sinkslimited to afforestation, reforestation
and deforestationsince 1990 towards their Kyoto targets.
Article 3.4 provides for a further decision to be taken
as to which additional human-induced activities in the agricultural
soils, land-use change and forestry categories can be counted.

 A compliance procedure to be developed
to address cases of non-compliance.

 Protocol to enter into force after
it has been ratified by 55 Parties to the Convention, including
developed countries accounting for at least 55 per cent of the
total carbon dioxide emissions of this industrialised group in
1990.

The EU subsequently agreed to redistribute its
Kyoto target between the Member States under a burden sharing
agreement (the "EU bubble"). The UK agreed to reduce
its emissions by ¸12.5 per cent. Other targets include Germany
-21 per cent, Netherlands ¸6 per cent, France 0 per cent,
Spain +15 per cent, Portugal +27 per cent.

THE BUENOS
AIRES PLANOF ACTION

Kyoto was a significant political achievement.
It provided a global framework for action to reduce greenhouse
gas emissions, and for the first time developed countries agreed
to take on legally binding targets. But Kyoto also left many detailed
questions about implementation unresolved, and since 1997 the
negotiations have focussed on resolving these issues. COP4 in
Buenos Aires in November 1998 agreed a two-year Plan of Action,
with the aim of reaching an agreement at COP6. This included an
enormous amount of technical work, particularly in relation to
the detailed rules and procedures needed to operationalise the
Kyoto mechanisms.

Between 1998 and 2000 negotiations continued
at official level, through meetings of the Subsidiary Bodies to
the COP and a series of informal consultations and workshops.
Ministers intervened at key points in the process to take stock
and give a political steer to officials. In view of the considerable
amount of work still to be completed, Parties agreed at COP5 in
November 1999 to an intensification of the work programme, including
an additional two-week meeting of the Subsidiary Bodies in September
last year.

As a result significant progress was made in
resolving technical issues and secondary political issues, though
a large number of issues still needed to be resolved at COP6.
The process also clarified the key outstanding political issues
which needed to be resolved.

COP6

The three principal negotiating groups are the
EU, the Umbrella Group (including the USA, Japan, Canada, Australia,
New Zealand, Russian Federation, Norway), and the developing countries
(G77 and China). The UK negotiates as part of the EU. The Member
State currently holding the Presidency usually speaks on behalf
of the EU in the negotiations. France held the EU Presidency during
COP6.

The key political issues to be resolved at COP6
were as follows:

Article 3.4 sinks:

The extent to which "additional" sinks
activities under Article 3.4 could be counted towards the Kyoto
targets. The EU argued that although sinks had a role to play,
the emphasis should be on action to reduce man-made emissions.
We were concerned that the potential scale of sinks activities
could enable developed countries to meet their targets without
taking significant domestic action to reduce their emissions.
We estimated that Article 3.4 sinks could generate credits of
up to 1000 MtC[3]
a yearapproximately equivalent to the total emission reductions
which developed countries would need to make (based on business-as-usual
projections). Our view was that the vast majority of this amount
was not additional activity. Permanence was an issue, since forests
could burn down or be destroyed by pests. There were also considerable
scientific and other uncertainties and risks, including difficulties
in monitoring and verifying sinks, which needed to be addressed.
The EU's position was therefore that no Article 3.4 sinks should
be counted in the first commitment period unless our concerns
were met. The Umbrella Groupin particular the US, Canada
and Japanargued that full credit should be given for sinks
activities in the first commitment period. The United States made
proposals which would have given it 312 MtC a year from sinks.

Sinks in the CDM:

A number of developing countries, particularly
in Latin America, argued that sinks projects should be eligible
for the Clean Development Mechanism. They were strongly supported
by the US and other members of the Umbrella Group. The EU, along
with many developing countries, including China, India and the
small island states, pointed out that this was not foreseen in
the Kyoto Protocol. The EU argued that its concerns about Article
3.4 sinks applied even more strongly to sinks in the CDM, and
with the additional problems of "leakage" (ie a project
could be undertaken in one area of a developing country while
another area was deforested instead) and "additionality"
(ie how to establish whether a project was genuinely additional
or whether it would have taken place anyway).

Supplementarity:

The extent to which the Kyoto mechanisms could
be used to supplement domestic action. The EU insisted that it
was necessary to define "supplementarity", and had proposed
a quantitative cap (or "concrete ceiling") on the use
of the Kyoto mechanisms which would effectively have meant that
each developed country would have to meet about half its required
emission reductions through domestic action. The Umbrella Group
was strongly opposed to any constraints on the use of the Kyoto
mechanisms, arguing that this would significantly increase the
cost of meeting the Kyoto targets.

Compliance:

Most countries accepted the need for a comprehensive
compliance regime to facilitate compliance and deter non-compliance,
but views differed as to what the consequences of non-compliance
should be. The EU had proposed that Parties in non-compliance
should face binding consequences, including a requirement to produce
a compliance action plan setting out how they intended to make
good their excess emissions through additional policies and measures.
Some Umbrella Group countries (including Japan, Canada and Russia)
were opposed to binding consequences.

The EU was also concerned that emissions trading
created a new source of possible non-compliance with the Kyoto
targetsso-called "over-selling". Over-selling
occurs when a country sells part of its permitted emissions ("assigned
amount") that it needs to meet its target. The EU had signalled
its willingness to work on the basis of a proposal originally
put forward by the small island statesthe commitment period
reserveas one way to try to reduce this risk. Under this
proposal, countries could only trade a limited proportion of their
assigned amountthe majority would be put aside in a reserve
and could not be traded. The Umbrella Group was opposed to this,
regarding it as a further unnecessary constraint on the use of
the Kyoto mechanisms, though by COP6 they were beginning to recognise
the dangers of "rogue" over-selling (ie wilful overselling
by a Party with no intention to comply).

Funding for developing countries:

The G77 and China had made clear that no deal
would be possible unless developed countries agreed to make available
significant new financial resources to address their Convention
commitments to support technology transfer, capacity building,
and adaptation to the adverse effects of climate change and of
response measures. Saudi Arabia in particular was insistent that
any deal must include actions to address the concerns of countries
whose economies are dependent on fossil fuels. The EU and the
Umbrella Group both indicated that they were ready to provide
further assistance to developing countries, but that compensation
for OPEC and others was out of the question.

THE PRONK
PAPER

The Ministerial segment of COP6 did not begin
until 20 November. COP6 was chaired by Jan Pronk of the Netherlands,
who played a key role in the proceedings. On the evening of 23
November, ie on the Thursday of the second week, he presented
a paper (attached at Annex A) setting out his proposals, the key
elements of which were as follows:

Article 3.4 sinks:

Forest management, cropland management, grazing
land management and revegetation eligible for credits, with discounting
to factor out non-direct human-induced effects and to address
uncertainty, with total credits limited to 3 per cent of each
developed country's base year emissions,.

Sinks in the CDM:

Afforestation and reforestation projects to
be eligible for the CDM, with a process to establish ways of addressing
concerns about permanence, social and environmental effects, leakage,
additionality and uncertainty. Other forms of sink activity, such
as avoided deforestation, were not included.

Supplementarity:

Developed countries to meet their commitments
primarily through domestic action. Compliance to be assessed by
the facilitative branch of the compliance committee (ie scope
for naming and shaming but no sanctions for non-compliance).

Compliance:

Excess emissions to be subtracted from a Party's
assigned amount for the subsequent commitment period at an initial
penalty rate of 1.5. Parties in non-compliance to submit a compliance
action plan setting out how they intended to meet their commitments
in the subsequent commitment period.

Funding for developing countries:

Two new funds to be established under the Global
Environment Facility (GEF):

An Adaptation Fund to implement adaptation
projects in developing countries. Funded from a 2 per cent levy
on the proceeds of CDM projects.

A Convention Fund to support activities
including capacity building and technology transfer. Funding to
come from the third GEF replenishment, voluntary contributions,
ODA and a levy on developed countries' assigned amounts (ie part
of their emission allowances, expressed in tonnes of carbon, which
could be sold on the international emissions trading market).

Mr Pronk invited Parties to submit written comments
on and amendments to his paper. Having considered these submissions,
late on 24 November (the final day of the conference) he convened
a meeting of key Parties from each of the main negotiating blocs
with a view to brokering a deal.

EU-UMBRELLA GROUP
DISCUSSIONSATTHE ENDOF COP6

By the early hours of the morning it was becoming
clear that at the current rate of progress it would not be possible
to reach an agreement. At this point I approached Dominique Voynet
and suggested that we should make contact with the Umbrella Group
to see whether we could break the deadlock. Mme Voynet agreed
that I should seek discussions with Frank Loy, the chief US negotiator.
It was also agreed that French officials would be fully involved
throughout.

When I met Frank Loy he shared my view that
there was a very real danger that COP6 was not going to reach
agreement. We therefore agreed to ask our officials to work up
the broad outline of a deal on the key political issues dividing
the EU and the Umbrella Group, which we could feed in to Jan Pronk
in order to facilitate his work. Officials and Ministers from
a number of EU and Umbrella Group countries were involved at various
points in these discussions. We were of course fully aware that
any deal would need to be agreed by all Parties, and that the
views of G77 and China would need to be taken into account.

Our understanding of the proposed package was
that it contained the following elements:

Article 3.4 sinks:

Eligible activities same as in the Pronk paper,
with discounting to factor out indirect effects, BUT with US,
Canada and Japan capped at 50, 15 and 15 MtC per year respectively
for forest management, with the prospect of perhaps an additional
24MtC for soils. There would be no credits for other developed
countries from 3.4 sinks activity.

Sinks in the CDM:

No sinks in the CDM in the first commitment
period. A process established to study issues of permanence, additionality
and leakage.

Supplementarity:

Agreement that domestic action should constitute
a significant part of each developed country's required emission
reductions. Each developed country to submit a detailed report
on the effects of its domestic actions, with compliance with this
reporting requirement to be assessed by the facilitative branch
of the compliance committee.

Compliance:

Parties in non-compliance to submit a compliance
action plan, including as a priority measures to restore the excess
emissions through domestic action, acquisition of emission credits
from the preceding commitment period or mitigation projects.

In my view this would have represented a good
deal for the EU compared to the Pronk package, and according to
our calculations would have resulted in a saving of between 160
and 430 MtC per year, depending on the assumptions used. More
importantly, it would have resolved the outstanding difficulties
and enabled governments and businesses to move forward to taking
real action with greater certainty.

This deal was initially agreed by Ministerial
representatives of France, Sweden, Germany, Denmark, the UK and
the Commission, together with representatives from the US, Canada,
Japan, Australia and New Zealand. When the package was later put
to all fifteen EU ministers, the majority view was that the deal
should be rejected, since some Member States felt that on the
basis of the available information they could not be sure that
it would safeguard the environmental integrity of the Kyoto Protocol.
This message was relayed by the French Presidency to Jan Pronk
and Jan Pronk concluded that a deal would not be possible within
the time available.

Later that morning Mr Pronk convened a final
plenary session and announced that regrettably it had not been
possible for COP6 to reach agreement. There was nevertheless a
strong feeling among Parties that although we had not been able
to do a deal, we had come very close. We agreed that it was important
to avoid a loss of momentum and that we should therefore aim to
resume negotiations as soon as possible. It was agreed that COP6
should be suspended and that Jan Pronk would consult Parties with
a view to its early resumption.

EU-UMBRELLA GROUP
DISCUSSIONS POST-COP6

Further contacts between the EU and the Umbrella
Group took place immediately after COP6 to see whether it might
be possible to reach a political understanding on the key issues
that divided us. Canada hosted a meeting involving officials from
a number of EU Member States and Umbrella Group countries, in
Ottawa on 6 and 7 December, to explore whether there was sufficient
common ground to proceed with a Ministerial meeting before Christmas
in Oslo.

In Ottawa it emerged that the two sides now
had different understandings of the political package which had
been discussed in the early hours of 25 November in The Hague.
In particular:

 the Umbrella Group insisted that
it could not agree to no sinks in the CDM in the first commitment
period. In Ottawa they claimed that a decision would simply have
been deferred, pending the results of technical work to address
the EU's concerns.

 The Umbrella Group was not prepared
to argue that only the US, Canada and Japan should get credits
for Article 3.4 sinks.

Nevertheless technical discussions continued
and compromise options were prepared with a view to a possible
Ministerial meeting in Oslo. EU Ministers then met at the Environment
Council in Brussels on 18 December and considered their position.
They agreed that while the Ottawa meeting had revealed further
differences of opinion, they were willing to proceed with the
Oslo meeting. They also agreed that the EU should make clear its
negotiating position, signalling that we could accept a limited
opening of Article 3.4 sinks in the first commitment period as
part of a political deal, but that we saw major difficulties in
allowing sinks in the CDM, and that we continued to believe that
domestic action should constitute the primary part of each developed
country's emission reductions. The troika was mandated to relay
the EU's position to Umbrella Group representatives in a conference
call. The Umbrella Group took note of the EU's position as presented
by the troika and decided that they did not wish to proceed with
the Oslo meeting, on the grounds that there was insufficient reason
to believe that it would be a success.

WHAT WENT
WRONG?

A number of factors contributed to the unsuccessful
outcome at COP6:

 These were highly complex negotiations.
The sheer volume of technical detail and the many linkages between
the issues made agreement very difficult to achieve.

 Parties failed to get down to real
negotiation early enough. Ultimately negotiators simply ran out
of time in The Hague.

 The need to agree everything by consensusand
the complex web of often conflicting geo-political interestsmeant
that progress in the two years leading up to COP6 was much slower
than we would have liked.

NEXT STEPS

It was widely assumed that "COP6 bis"
would be held in the slot already reserved for a meeting of the
Subsidiary Bodies, from 21 May to 1 June 2001. However, the United
States contacted Mr Pronk in January with a request that the meeting
be held in July, in order to give the new Administration more
time to prepare its position. The COP Bureau met on 12 February
and agreed that COP6 bis should be held between the middle of
June and the end of July. Having reviewed various possible dates
and venues, Mr Pronk has now announced that the only cost-effective
option is to hold COP6 bis in Bonn from 16 to 27 July.

After COP6 Mr Pronk invited Parties to submit
further written comments and amendments to his paper, and a large
number were submitted, mainly by developing countries. He has
been considering the views expressed by Parties, and is conducting
further informal consultations, with the aim of tabling new proposals
in early April. He then intends to hold informal high-level consultations
involving ministers from key Parties in New York on 21 April.
He has also encouraged bilateral discussions between Parties and
regional groups.

The position adopted by the new US Administration
will clearly be important. The Department of State leads for the
US in the negotiations, but at the time of writing their lead
negotiator has not yet been appointed. However, Christine Todd
Whitman, the new Administrator of the US Environmental Protection
Agency, outlined the Administration's initial position at a meeting
of G8 Environment Ministers in Trieste from 2 to 4 March. She
said that the Bush Administration accepted that climate change
was one of the greatest environmental challenges facing the world,
and that there was increasingly little room for doubt that it
was caused by man-made emissions. She said that the Administration
was committed to the UN FCCC and to international action to reduce
emissions in line with the aims of the Kyoto Protocol. However,
the Administration was conducting a fundamental review of the
US position on climate change, and she did not wish to prejudge
the outcome, though she emphasised that the US would not necessarily
wish to pick up negotiations from the point they reached in The
Hague. We will be strongly encouraging the new Administration
to engage constructively in the negotiations on the basis of the
Kyoto Protocol.

In the meantime the EU is continuing to reflect
on its position, though clearly it is difficult for us to move
forward until we know the outcome of the US review. The Government
remains committed to securing an effective international agreement
to reduce greenhouse gas emissions, and we will be doing everything
we can to promote an agreement at the resumed COP6 which will
pave the way for ratification and entry into force of the Kyoto
Protocol by 2002.